2018-07-20

Dollar Analog Update

I still think the dollar is showing an analog pattern with the late 1990s bull market. The numbers 5, 6 and 7 are rough ideas and are not timing estimates. If the time of the entire pattern were to perfectly match the late 1990s bull market, the top would come in June 2019. It's a small sample set, but dollar tops have previously come at year-ends. September/October tend to be the worst for financial markets. Therefore I would hazard late 2019 is as good a time as any for a top to be in.

5. DXY peaks in June 1998 at 102.25
6. DXY bottoms in October 1998 at 92.22
7. DXY peaks in October 2000 at 118.59

Could the dollar hit 120, or even 130 to 140? It would be consistent with an extreme (within the realm of possibility, not a "Black Swan") conclusion to the U.S. dollar bull market. Some reasons why the dollar could top higher than in 2000:

1. The 2000 peak was a negative time for the markets, but we had just hit a peak in mood. The Euro was launching as a physical currency.
2. The euro might break apart this time. Mood is very negative, economies weaker. Euro bottomed at $0.85 in 2000 in much better shape relative to USA. Plaza Accord was cooperative in 1985. This time, maybe no consensus, delayed action or less potent agreement.
3. Japan went from bad to worse over the past 18 years.
4. The dollar bull markets of the early 1980s and late 1990s were accompanied by major EM blow-ups (LatAm, Asia). Maybe the Fed papered it over this time? Or maybe it is front of us.
5. In both cases the Fed is tightening, U.S. markets are outperforming, technology is leading, the U.S. economy is relatively strong.
6. Spread between 10-yr UST and 10-yr German bunds already higher and likely going higher still
7. Fundamental shifts in areas such as trade, energy production, could be catalysts for bigger currency moves
Finally, I should point out that I will do fine if the U.S. dollar tops tomorrow and gold prices begin a breakout phase of a long bull market. This is merely where I place the weight of evidence (and short-term speculative bets) right now, I still believe the high for the dollar in this cycle has yet to be seen.

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